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Italy Info · Joined: 21 Oct 2006 Posts: 18 Home Country: italy

DOING BUSINESS IN ITALY

CHOICE OF BUSINESS ENTITY

Principal Forms of Business

Legislative Decree 6 of 2003 introduces reforms to both joint-stock and limited-liability companies; it came into force on January 1st 2004. Existing companies had to adjust their articles of association, if necessary, to comply with the new rules by September 30th 2004. The joint-stock company (societa per azioni—SpA) is the form usually chosen by medium-sized and large companies; the limited-liability company (societa a responsabilita limitata—SrL) is the legal form usually adopted by smaller entities. In general, the choice of one legal form or another can influence relationships with third parties (such as banks, clients or suppliers), which tend to associate the SpA with a larger entity.

Requirements of a societa per azioni (SpA)
Capital. Minimum €120,000. Capital can be divided into shares in various ways: as different categories of shares, bearing different rights; as both registered shares and bearer shares; and with specific conditions on the transfer of shares. The contribution of assets requires a valuation to be made by an expert appointed by the court.

Founders, shareholders. A sole shareholder may incorporate a corporation. The minimum number of shareholders is one. There are no limitations on the maximum number, nationality or residence.

Governance. Under Legislative Decree 6, SpAs may choose their own management and control structure from three models of governance: (1) the “ordinary” structure used up to now, based on the shareholders’ meeting, which appoints the administrative body (board of directors or sole director) and the supervisory body (board of auditors). (2) The “dualistic” structure, with a management board that administers the company and a supervisory board appointed by the shareholders’ meeting. The supervisory board may be composed of both partners in the company and non-partners; it must have at least three members, one of whom must be listed on the auditors’ register. (The Ministry of Justice keeps a register of recognised auditors for unlisted companies. Consob maintains a register of recognised auditors for listed firms.) The supervisory board is responsible for appointing and removing the members of the management board and for approving the accounts. (3) The “monistical” structure involves a board of directors with administrative tasks appointed by the shareholders’ meeting and a supervisory management board elected internally in the board of directors.

There are no limitations on the number, nationality or residence of directors, who are appointed for a period not to exceed three years. Board meetings may be held outside Italy.

Disclosure. Italian companies must prepare a profit-and-loss account and a balance sheet each year. A simplified form of accounts based on the same principles is available for smaller companies.

Financial statements must include details of controlled and associated companies (minimum 20.01% capital holding or 10.01% if quoted on the stock exchange) with their nominal and book value. The balance sheets of these companies must be attached. The balance sheet must be approved by an ordinary shareholders’ meeting called within four months (in special cases, six months) of the end of the company’s financial year. Notice must be published in the Official Gazette 15 days before; thereafter, the balance sheet must be filed at the court in whose jurisdiction the company’s registered office has been established. The fact of deposit must be published in the official companies’ bulletin.

The directors must also prepare an annual report on all aspects of the company’s activities. It must include the following information: research and development; investments; costs; prices; relationships with holding, subsidiary and associate companies; significant events since the close of the financial year; and future prospects. These standards must be followed rigidly, under penalty of the shareholders’ refusal to approve the balance sheet. Annual reports are not required for smaller companies, which prepare short-form balance sheets. The threshold for turnover (which determines whether a company may prepare short-form balance sheets) is €309,874 for companies that provide services and €516,460 for other companies.

Taxes and fees. There is a fixed registration tax of €129 on contributions to capital in the form of cash, moveable property or companies. The registration tax is 4% for industrial plant or industrial building land, 7% on contributions of buildings, 8% on non-agricultural land and 15% for farmland. Property transfers required to complete contributions in kind may be subject to mortgage tax and cadastral tax. A flat fee of €119 is levied upon registration of the new company. There is an annual charge of €309.87 to endorse company books, or €516.46 if a company’s capital exceeds €516,456.

Types of shares. Since January 2004 the following types of shares can be issued in SpAs: shares with full voting rights, with limited voting rights and with no voting rights. The last two types are limited to employees.

Control. Unless corporate byelaws require more, a simple majority of those present is sufficient for ordinary business matters. Shareholders representing more than one-third of capital must approve major changes, such as a merger. Shareholders representing more than one-half of capital must approve changes of corporate purpose, relocation of headquarters abroad and certain other changes. Under reforms implemented on January 1st 2004, beginning in 2009 shareholder pacts (agreements between shareholders to form a majority within a shareholders’ meeting) will have a maximum duration of five years and must be declared at the beginning of each meeting for companies making recourse to risk capital.

Establishing a Branch

A parent firm seeking to register a branch must deliver a power of attorney notarised by an Italian consulate in the home country. The firm must also furnish copies of the deed of incorporation and the parent company statutes. There may be advantages to operating through a branch, since other requirements for its establishment are simpler than for a local corporation. Moreover, there is no minimum statutory capital requirement for a branch. Procedures on establishment do not vary by type of branch.

Under Legislative Decree 516/92, implementing EU Directive 89/666, foreign companies are required to publicise the formation of branches in Italy by a notice in the official companies’ gazette

Setting up a Company

The local one-stop shop (sportello unico), where activated, has significantly reduced the time needed to set up a business. It now takes an average of three months.

Legislative Decree 6 of 2003 has significantly changed the rules governing the societa per azioni (SpA) and the societa a responsabilita limitata (SrL). The idea governing the reform is that the SrL is now considered a sort of “limited partnership” (that is, an entity in which the personal element of the quota holders assumes major importance, though it still can benefit from a regime of limited responsibility). SpAs have been provided with new instruments to manage better situations that are typical of medium-sized and large companies.

To set up an SpA, founders sign the company’s articles of incorporation and subscribe all or part of the share capital in the presence of a notary public. Since January 1st 2004 there has been a minimum capital requirement of €120,000 to set up an SpA. Higher minima apply in banking, insurance and mutual funds (unit trusts). An SpA may now be established by a sole shareholder.

The founders must deposit a minimum of 25% (previously 30%) of the initial share capital in an interest-bearing account at a credit institute, pending authorisation to operate. The company may own up to 10% of its own shares.

The local chamber of commerce decides whether legal requirements have been met, and it orders registration and completion of other formalities. Until approval is given, shares may not be issued or sold, though business activity may begin under the directors’ personal liability.

The articles of incorporation may include contributions to the company of credits or goods in kind as well as moveable property, patents or know-how. Contributions must be of a type that can be assigned to the company at the outset (like a building lease that is signed over) and may not take the form of an undertaking to provide regular services (eg catering).

For a contribution in kind, a sworn appraisal by a court-designated expert must be attached to the articles of incorporation. Within six months of a company’s establishment, the directors and statutory auditors must verify the value of the contributed assets. If they fall short of the assigned value by more than 20%, a proportional reduction must be made in the capital stock unless the balance is paid in cash by the shareholders. Any future contribution in kind must be approved by a full shareholders’ meeting.

A foreign business may establish an SrL, with minimum capital of €10,000. The capital must be fully paid in for an SrL or an SpA with a single shareholder. In establishing an SrL, any asset that can be subject to an economic evaluation may be contributed; this includes obligations deriving from work or services rendered. Unlike the shares of an SpA, the capital interests in an SrL may not be embodied in negotiable certificates. Liability for both an SrL and an SpA rests with the company to the full extent of its assets; shareholders/quotaholders are not liable beyond the amounts subscribed.

Regulations on the number, nationality or residence of directors of an SrL are the same as those for an SpA. However, directors of an SrL must be shareholders, whereas directors of an SpA need not be (unless so specified by the articles of incorporation).

A new company form is the Societas Europaea, or SE (European Company), introduced in EU Regulation 2157/2001 of October 8th 2001 but effective only from October 8th 2004. From that date, companies from two or more EU member states are permitted to merge to form an SE, create an SE holding company or branch. A company will be able to convert an existing firm to SE status without liquidating. One advantage of the SE is that it will be possible to move headquarters to another EU member country with a minimum of formalities.

BUSINESS TAXATION

The corporate tax rate for tax years 2004 and 2005 is 37.25%, comprising a 33% corporate tax (imposta sul reddito delle societa—IRES), and a 4.25% regional tax (imposta regionale sulle attivita produttive—IRAP). Under planned tax reforms, IRAP was to be phased out by 2006, but no implementing legislation has yet been passed to this effect.

The Ministry of Economy and Finance reorganised its tax department in 2000–01 to enhance efficiency. Under the previous system, the department had separate units for each type of tax. Since January 2001 four agencies perform the functions of the tax authorities: revenues, customs, territory and real estate. Specialised units monitor large taxpayers, both centrally and regionally.

Fiscal decentralisation is becoming a reality. Until the early 1990s there was a high degree of centralisation of revenue, accompanied by significant decentralisation of expenditure. As of 1990 revenue at the local government level increased with the introduction of the municipal tax on buildings (imposta comunale sugli immobili—ICI), regional and municipal surtaxes on personal income tax (imposta sul reddito delle persone fisiche—IRPEF) and IRAP.

The introduction of sectoral studies (Law 549/95), begun in 1999, is now complete. They establish minimum expected returns for the self-employed and companies with simplified accounting and earnings of no more than €5.16m in all sectors of business and based on geographical location. Companies and individual taxpayers declaring income considered “incongruous” with sector standards must explain the disparity.

Although permanent establishments and subsidiaries are taxed at the same rate in Italy, most foreign companies find it preferable to set up a subsidiary corporation. Nevertheless, the permanent establishment form may be preferable if losses are expected during the first few years of operation and if the foreign parent could use the losses to offset its own profits.

Rulings on tax disputes have been slow to emerge. Many companies involved in disputes have used periodic tax amnesties to clear them from their books, even if they do not regard themselves as having been at fault. Under laws 289/2002 and 27/2003, the government offered a wide range of tax amnesties in 2003–04 to individual and corporate taxpayers who failed to fulfil their tax liabilities in tax years 1997–2002. In late 2004 the European Commission (EC) called on Italy to amend part of the 2003 tax amnesty relating to value-added tax payments; the EC believes that this part of the amnesty undermines the proper collection of community resources.

Loss relief
Losses as determined for corporate income tax (IRES) purposes may be offset against taxable income until the fifth subsequent tax period, but only for IRES purposes. Under a specific anti-avoidance rule, where changes occur both in the direct or indirect majority of ordinary shareholders’ meeting and in the business purpose, the loss carry regime does not apply. This provision does not apply in an intra-group context (ie an exception is made if the majority of shareholders changes but it is maintained within the same group) or with reference to shares in companies having certain amounts of revenues and significant employment levels. No loss carryback is allowed.

Losses incurred by a company during the first three taxable periods may be carried forward without any time limit.

The tax rate applicable to realised foreign-exchange gains or losses is the same as for ordinary corporate income.

Consolidation
Domestic consolidation. Starting from the taxable period beginning January 1st 2004, consolidation for tax purposes is available to domestic groups, with each subsidiary in a group free to choose whether or not to consolidate.

Consolidation is available to a parent and its resident companies that are under its direct or indirect control. The control requirement is met when the participating company holds more than 50% of the share capital of another company and is entitled to more than 50% of the profits of that company.

Domestic consolidation may also be adopted if a non-resident company is the controlling company but only if the company is resident in a country that has concluded a tax treaty with Italy and it carries on business activities in Italy through a permanent establishment to which the participation in the controlled Italian company is effectively connected.

Where an election is made for consolidation with a parent company, the election may not be revoked for three years unless the subsidiary ceases to be controlled by the parent.

Under the domestic consolidation regime, a single taxable income is determined for all companies included in the tax consolidation.

Group taxable income is equal to the sum of all the companies’ taxable incomes, disregarding the participation amount of the controlling company.

The single taxable income thus calculated is reduced by the amount of taxable dividends distributed by the controlled companies included in the consolidated group, the amount of non-deductible interest under the “equity pro-rata” interest deduction and by specific intercompany transfer of assets.

Tax losses of the years preceding the election for group taxation may only be used by the company that incurred the losses.

Domestic tax consolidation is not available to companies benefiting from a reduction of the corporate tax (IRES).

Worldwide tax consolidation. This is allowed provided that all controlled non-resident companies opt for consolidation (ie the “all in, all out” principle). The definition of control for these purposes is the same as that under domestic tax consolidation.

To opt for the consolidation, several conditions must be met and the regime may not be revoked for five years.

Taxable income of the consolidated group is determined by adding the taxable incomes of the companies in proportion to the profit participation held by the controlling company.

Tax payable is determined by deducting from taxes due (calculated by applying the corporate income-tax rate to the group’s taxable income) foreign tax credits related to the taxes paid abroad by the foreign subsidiaries.

Flow-through taxation
Starting from the taxable period beginning January 1st 2004, Italian companies may opt for flow-through taxation if all the shareholders are resident companies that hold at least 10%—but no more than 50%—of the company shares. According to the regime, the taxable income (profits or losses) of the Italian company can be attributed to the shareholders in respect of its participation and included in their taxable profit accordingly, regardless of whether profits are distributed.

This option, which must be exercised by all companies involved and may not be revoked for three years, is not permitted if the transparent company has issued certain financial instruments (this provision is currently under discussion and it could be abolished starting from 2005) or if the transparent company opts into the tax-consolidation regime.

Flow-through taxation is also available with respect to resident entities with foreign shareholders provided the foreign shareholders are not subject to withholding tax in Italy on dividend distributions.

The flow-through taxation regime is also applicable to small companies having a number of individual shareholders not higher than 10 (20 in the case of co-operative companies).

Taxable income and rates

Corporate income tax (IRES) is levied on both retained and distributed profits at a rate of 33%. It is assessed for independent companies, subsidiaries and permanent establishments of non-resident persons on revenues derived from worldwide activities, less business expenses. A minimum taxable income for IRES purposes must be reported by applying rules especially provided for non-operating companies. Taxable income for banks, insurance companies and other financial intermediaries is calculated differently, according to their activities.

Regional tax (IRAP) is levied on the net value of the production derived in each Italian region. The ordinary tax rate is 4.25%. Regions may increase or decrease the rate up to 1 percentage point.

There is no excess-profits or alternative minimum tax in Italy.

The following calculations show the tax burden on an Italian subsidiary of a foreign company domiciled in a country outside the EU with which Italy does not have a double-tax treaty. It assumes that the subsidiary distributes all of its post-tax income as dividends to non-resident shareholders. The tax burden would be lighter if less income were paid in dividends, if the parent were domiciled in the EU or if Italy had a tax treaty with the country of the non-EU parent.

Taxable income defined
Corporate income tax (IRES) is assessed for independent companies, subsidiaries and permanent establishments of non-resident persons on revenues derived from worldwide activities, less business expenses. Taxable income for banks, insurance companies and other financial intermediaries is calculated differently, according to their activity.

The regional tax (IRAP) identifies a different form of wealth as a valid indication of contributory capacity. IRAP is calculated on production of “net added value”, independent of income, assets or other conventional indicators on which taxation is based. IRAP taxes this net added value produced by organisations or individuals producing goods or providing services. Net added value comprises value of production minus some costs of production (contributions for all forms of compulsory insurance against accidents at work, expenses related to apprentices, 70% of the cost of personnel hired under training contracts and depreciation).

The 2005 budget bill, passed on December 30th 2004, will increase the general deduction from the IRAP tax base from €7,500 to €8,000, for companies with a taxable base lower than €180,760, for tax year 2005. Deductions will be introduced for each new hire of €20,000, increasing to €40,000 for each new hire in the south and in disadvantaged areas.

Law 388/2000 provides for a tax credit of 60% for companies investing in information technology, and tax credits for companies in certain sectors that invest in certain disadvantaged areas. The same law provides for tax deductions for companies making environmentally friendly investments. These investments may be declared in company budgets and subsequently deducted.

International companies may keep multi-currency accounts and then must value current credits and debits at the euro’s exchange rate at the end of the financial year. Non-current credits are valued at the historical exchange rate or at the rate at the end of the year if lower. The same legislation extends existing valuation principles to off-balance-sheet operations in futures, options, domestic currency swaps, forward rate agreements and interest rate swaps.

The authorities treat foreign-exchange transactions on the basis of realised and unrealised gains or losses at year-end, exclusive of transactions covered by forward contracts or other forms of hedging. Actual gains must be reported and are taxed; actual losses are deductible.

A tax credit is allowed against Italian net tax for final tax paid on foreign earnings in the year in which the final foreign tax was paid. The amount of the credit may not exceed the amount of Italian tax due. (This may vary under the provisions of a double-taxation treaty.) Foreign tax credit may be carried forward/backward for up to eight years.

Interest and other earnings from bonds sold by unquoted joint-stock companies may not be deducted from taxable income if the interest exceeds certain amounts; advertising and entertainment expenses may be deducted over five years.

Research expenditures may be deducted entirely in the year of the accrual or deducted at an annual rate of 20% in that year and the following four years. Financial contributions to research are deductible on the same basis.

Losses as determined for IRES purposes may be offset against taxable income until the fifth subsequent tax period, but only for IRES purposes. No loss carryback is allowed.

Losses incurred by a company during the first three taxable periods may be carried forward without any time limit.

It is possible to use tax credits to pay tax debits. This is important partly because of the long periods of time the tax authorities have traditionally taken to return credits. The annual limit for the amount of credit that can be used to pay off tax debt is €516,000.

Depreciation
The straight-line method of depreciation is used in Italy and the basis of valuation is the historical cost of the assets. Maximum annual depreciation rates vary by industry. Land is not depreciable. Under Italy’s unified tax code, the rate used for ordinary depreciation of assets must be reduced by half when applied to an asset in the first year of use.

Depreciation of tangible assets may be anticipated during the first three years of an asset’s life. The maximum amount of advance depreciation is now twice the normal rate. Intensive depreciation increases normal depreciation in proportion to a more intense use of an asset compared with its normal use in that sector.

Companies may value inventory with the weighted-average, the FIFO (first-in, first-out) or the LIFO (last-in, first-out) method. Research expenditures may be deducted or depreciated.

Companies are occasionally allowed to revalue assets on favourable terms. Under Law 342/2000 and Law 448/2001, companies could revalue capital assets for financial years 1999, 2000 and 2001. The revaluation, recorded in the following year’s accounts, was taxed at 19% for depreciable assets and 15% for others, which could be spread over three years.

Dividend taxation
Starting from the taxable period beginning January 1st 2004, dividends distributed to Italian corporate entities by resident entities with legal status or non-resident entities (except for companies resident in blacklisted jurisdictions) are 95% not subject to taxation even in case of liquidation.

A 60% exemption will be available for dividends distributed by resident or non-resident companies (except companies resident in blacklisted jurisdictions) to Italian individuals.

Dividends related to non-qualified participations distributed by resident or non-resident companies to Italian individuals not conducting business activity are subject to 12.5% final withholding taxation.

Thin-capitalisation rules
Starting from the taxable period beginning January 1st 2004 particular rules were introduced to contrast the thin capitalisation of Italian companies. Such rules aim to limit the deductibility of interest in determining taxable income if certain conditions are met.

Specifically, if the ratio between the average level of financing granted or guaranteed by a “qualified shareholder” or its related parties and the net equity related to that shareholder and its related parties exceeds a ratio of 4:1, interest on the excess is not deductible. (For the first year of application of the thin-capitalisation rules, ie 2004 for taxpayers whose accounting period coincides with the calendar year, the ratio is 5:1.)

A shareholder is “qualified” if it controls, directly or indirectly, the financed party or if it has at least a 25% interest in the share capital of the financed party, also taking into account its related parties.

The thin-capitalisation rules do not apply if the overall debt-to-equity ratio (ie not just in relation to the single qualified shareholder but to all qualified shareholders) does not exceed 4:1, or the debtor demonstrates that the excess financing is justified by its own credit capability.

To avoid double taxation of the non-deductible interest, that interest is recharacterised as a dividend distribution and, consequently, the “dividend” is 95%-exempt.

The thin-capitalisation rules do not apply to companies conducting banking and financial activities, although they apply to companies carrying on, exclusively or primarily, a holding activity (ie the purchase and management of participations).

“Equity pro-rata” limitation on interest deductibility
Starting from the taxable period beginning January 1st 2004, with respect to the deductibility of interest expense, a limit is applied when the financed company holds participations benefiting from the participation exemption.

In particular, if the accounting value of the exempt participations exceeds the accounting net equity of the financed company, after applying the thin-capitalisation rules, interest is not deductible in proportion to the ratio between the excess (ie the difference between the value of the exempt participations and the accounting net equity) and the liabilities of the financed company (ie total assets less equity and commercial debts).

These limits do not apply when the exempt participations are held in a company that elects for tax consolidation with the financed company; or the exempt participations are held in a company whose income has been attributed to the holding company under the flow-through taxation regime.

Capital gains taxation

As a rule, realised capital gains are subject to corporate income tax (IRES) at 33%. Capital losses are deductible only if realised.

In case of assets held for a period of time not less than three years, it is possible to opt for taxation in five years.

Participation exemption
Starting from the taxable period beginning on January 1st 2004, capital gains deriving from the sale of participations are exempt from taxation if the following requirements are met:

* The minimum holding period of the participation is 12 months.

* The participations are classified as financial fixed assets in the first financial statement closed pursuant to the participation acquisition.

* The participant company is resident in a country not listed on the Italian “Black List” annexed to the Italian Controlled Foreign Companies legislation.

* The participant company conducts a business activity (this requirement would not be met if assets are primarily represented by real estate not used in the activity of the business).

There is no tax deduction for capital losses or expenses, and there is taxation of any devaluation deducted in the two tax years prior to the enactment date of the law (hence years 2002 and 2003) when making the sale.

Foreign income and tax treaties

Italy has double-tax treaties with 74 countries. A company in a treaty country is subject to Italian taxation on commercial or industrial profits if it has a permanent establishment there. The Italian courts have for years been deliberating the meaning of “establishment”. To date, a local subsidiary acting as an agency or administrative or sales office for the parent has usually been considered a permanent establishment. It should be assumed that the tax authorities will interpret the terms in their own favour.

Transfer pricing

Planning for methods, documentation, penalties and other transfer-pricing issues is a complex undertaking. The business income of a resident enterprise arising from transactions with non-residents that directly or indirectly control the resident company, are under its control or are controlled by the same entity that controls the resident company, is assessed on the basis of the “normal value” of the goods transferred, services rendered or services received.

The normal value means the average price or consideration paid for goods and services of the same or similar type, in free-market conditions and the same level of commerce, at the time and at the place (or the nearest time and place) in which the goods and services were purchased or performed.

The Ministry of Economics and Finance has indicated the methods to determine the normal value (that is, cost-plus method, resale-price method, comparable—uncontrolled—price methods). The Ministry has also extended the control requirements by specifying that companies are deemed to be controlled where there is dominant influence (for example, exclusive sales rights to the other’s products, financial or technological dependence on the other, a family relationship or business decisions made or influenced by the other party).

Intercompany service charges are permitted only where there is clear evidence that the services involved benefit the Italian subsidiary.

The Ministry of Economics and Finance has also specified that royalty payments of less than 2% related to intangible assets are generally acceptable as tax deductions when they result from a contract signed before payment of the royalty and when documentation is sufficient to show that the costs are inherent in the business. Royalties of 2–5% are deductible when (in addition to the preceding conditions) it can be shown that the technical data justify the percentage and that the deduction is justified by legal elements in the contract (right of exclusivity, right to sublicense, right to discoveries and development of rights). Royalties of more than 5% (and all royalties paid to low-tax countries) are subject to special scrutiny; they will be permitted only in exceptional cases where the deduction is justified by the high technological level of the sector of activity.

Advance rulings in this area are available from the tax authorities.

Regardless of any intra-group relations, no tax deduction is allowed for expenses incurred in international transactions with a company in a country listed by the Ministry of Economics and Finance (ministerial decree of April 24th 1992) as a non-EU tax haven. The exclusion is sometimes limited to companies established under specific legislation or operating in certain types of businesses. The deduction is allowed if the resident person proves that the non-resident company conducts a real business activity or the relevant transaction(s) had a true business purpose and actually took place.

Turnover and other indirect taxes and duties

Italy’s value-added tax (imposta sul valore aggiunto—IVA) is similar to that of other European Union countries. It falls on importers, producers, wholesalers and retailers of goods and services. The IVA rates are 4%, 10% and 20%. Sales tax is 10% on construction work involving maintenance, restoration and restructuring of dwellings and on domestic services to needy persons.

IVA exemptions exist for some foodstuffs, export sales and the contribution of assets to a company (for instance, capital goods purchases). Importers pay IVA on invoice plus duty, at rates equal to those on locally made products.

In addition to the annual return, a single IVA communication must be returned by February 28th of the year following the relevant tax year. There have been changes to simplify the procedures for recording IVA payments, and Law 80/2003 made additional changes to the IVA, including further simplification.

Other taxes

Italy imposes a wide variety of direct and indirect levies, such as the following: registration and stamp duties on legal and banking transactions, mortgage taxes and land-registry taxes. In accordance with Law 80/2003, many of these specific levies are meant to be reorganised as a general tax on services (imposta sui servizi—ISE). This should apply to registration tax, mortgage taxes, land-registry taxes, stamp duty, government licence taxes, stock-exchange contract tax, insurance tax and entertainment tax.

Since 1996 companies or individuals occupying or owning premises for any use pay a local tax on solid urban waste (tassa sui rifiuti solidi urbani—TARSU), base on area and use. This tax became a tariff as of January 2003. It takes into account the amount of waste effectively produced and, like all tariffs, is subject to value-added tax.

There are government licence taxes on firearms, gambling, industrial and intellectual property, and books and accounts.

An initial registration tax of €119 is payable by corporations registered in Italy. Changes to the company statutes that require registration cost €77. Annual registration fees now reflect company turnover. Local chambers of commerce oversee registration and fees.

Annual endorsement of company books is fixed at €309.87, regardless of the number of pages endorsed, or at €516.46 if a company’s capital exceeds €516,456.

Tax compliance and administration

Companies must electronically file their annual corporate income-tax return (corporate income tax—IRES and regional tax—IRAP) within ten months following the end of the financial year. An annual value-added tax communication must be submitted by February 28th for the preceding calendar year.

An annual withholding agent return must be submitted by September or October (according to the type of income paid) of the year following the year of the payment of the amount subject to withholding tax.

Law 435/2001 co-ordinated and simplified the schedules for tax payment. Corporations must pay IRAP along with the balance and first pre-payment of IRES on declared profits by June 20th. The first pre-payment is 40% of 98% of IRES paid in the previous year. The second pre-payment (60% of 98% of IRES paid in the previous year) is due by November 30th. Paper tax returns are due by July 31st and Internet returns by October 31st. Companies whose financial year does not correspond with the calendar year make payments within day 20 of the sixth month and within the 11th month after the end of the financial year.

Tax evasion can be a criminal offence. The submission of an unfaithful tax return incurs a penalty varying from 100% to 200% of the higher amount of tax assessed. Late payments, or insufficient payments, incur a penalty of 30% plus interest.

Dates for paying withholding tax, value-added tax, social security payments and substitute taxes (which previously had different deadlines) have been standardized to the 16th day of each month.

PERSONAL INCOME TAXATION

Taxable income and rates

The 2005 budget bill, enacted on December 30th 2004, provided for changes in personal taxation. The changes reduced Italy’s five-tier income-tax system to four tiers (23%, 33%, 39% and 43%) and changed the tax credit for deductions for dependent spouses and children to deductions from taxable income (the so-called no tax family area) for tax year 2005.

Law 80/2003 states the general principles of the Italian tax reform. These aim to introduce, over the next several years, only two tax brackets instead of the previous five and to transform all tax credits (subtracted from tax payable) to deductions (deducted from income). Changes in personal taxation introduced for tax year 2003 included changes to tax brackets and rates, the introduction of a “no-tax-area”, transformation of tax credits into deductions and modification of tax credits.

Starting from 2004, dividends and capital gains on qualified shareholdings benefit from a 60% tax exemption. The remaining 40% is taxed under ordinary taxation (that is, progressive tax rates). Dividends and capital gains on non-qualified shareholdings are taxed at a 12.5% flat rate.

So-called sectoral studies were introduced in 1999 to combat tax evasion and to broaden the tax base. Moreover, the introduction of the “unico” tax return form, combining personal income tax (imposta sul reddito delle persone fisiche—IRPEF), value-added tax (imposta sul valore aggiunto—IVA) and social security data, made the work of the taxpayer easier and the checks of the tax department more efficient.

Taxpayers may download, complete and submit tax returns, and pay taxes directly via the Internet from the website of the Ministry of Economy and Finance.

Law 212/2000 introduced the statute of taxpayers’ rights, which state the general principles governing relations between taxpayers and tax authorities. Beginning in 2001 tax ombudsmen (garante del contribuente) were established in the regional tax offices to protect the taxpayer.

There are five tax brackets for tax year 2004: 23%, 29%, 31%, 39% and 45%. The 2005 budget bill introduces four tax brackets for tax year 2005. The lowest bracket of 23% will apply to income up to €26,000; a bracket of 33% will apply to income of €26,001–33,500; a 39% rate will apply to income of €33,501–100,000; and a 43% rate will apply to income exceeding €100,000.

Additional regional and municipal taxes have been introduced over the past few years as part of a move to decentralise taxation and administration. The additional regional tax was 0.9% in 15 regions for 2004. The other five regions had higher rates related to progressively higher income brackets (in Lombardy, for example, the rate was 1.2–1.4%). Each municipality annually determines the municipal tax rate, up to a maximum of 0.5%, and with an annual increase of not more than 0.2 percentage point.

For tax year 2004, self-employed persons pay a 17.8% (17.5% for 2005 tax year) compulsory social contribution on their autonomous (freelance) work due on amounts up to €82,401, while an additional 1% contribution is applied on income ranging from €37,883 up to €82,401. This contribution will reach 20% by 2008. A 10% contribution is due if the individual is contributing to another mandatory regime. When an employer contracts out services, that employer is responsible for contributing a percentage of the social contribution, depending on the type of work involved. Advance withholding tax is 20% on freelance work, 23% on commissions for agents and representatives, and 30% on remunerations to non-residents.

The examples below illustrate the personal tax burden for 2004 on a married person who has a dependent spouse (with income of no more than €2,840) and two children and who has negotiated a salary net of social charges of €50,000 or €90,000. For the sake of simplicity, it is also assumed that the taxpayer has no capital investments and is not liable for the IRAP regional tax, owns no property and is therefore not liable for ICI local property tax, earns no investment or self-employment income liable for the special health tax, has no deductible expenses (such as a life insurance premium in Italy, medical expenses or mortgage interest on a first house).

Determination of taxable income
Residents are liable for personal income tax (imposta sul reddito delle persone fisiche—IRPEF) on worldwide income, whereas non-residents are liable for IRPEF on Italian-source income. There are fewer deductions available to non-residents than to residents; these include some charitable donations.

Taxable income is calculated as total income less deductions. The tax due is that calculated on taxable income less tax credits (which vary by type of income—employed, self-employed or pension). Tax reforms introduced in 2003 started the transformation of tax credits into deductions. Tax credits for dependent spouses and children have increased for tax year 2004.

The “no tax area” deduction ranges from €3,000 allowed to every taxpayer to €7,500. In fact, €1,500 is added for the self-employed, €4,000 is added for pensioners and €4,500 is added for the employed. For income exceeding €26,000, the deduction decreases as income increases until income reaches €33,500 for the employed, €33,000 for pensioners, €30,500 for the self-employed and €29,000 for others. The tax credit on certain types of income remains but has been modified and limited to certain income levels.

The above deductions are to be considered only as “theoretic”. In fact, the actual “no tax area” deduction is allowed to the taxpayer according to the outcome of the following ratio:

* (26,000 + “theoretic no tax area deduction” (ie 3,000 + 1,500 or 4,000 or 4,500 depending on the type of income) + other deductions allowed by the tax code—total income)/26,000

* If the outcome is <= 0, then the “theoretic” deduction is not allowed.

* If the outcome is > 1, then the “theoretic” deduction is totally allowed (eg the employee will benefit from a deduction equal to €7,500).

* If the outcome is included between 0 and 1, then the “theoretic” deduction is allowed within the limit of the ratio (eg ratio= 0,5; deduction allowed to the employee = 0.5 * 7,500 = 3,750)

Qualifying expenses are deductible from taxes at a flat rate of 19%. Deductible expenses include the following: charitable donations up to certain limits depending on the beneficiary; interest on mortgages for first-time home purchases (up to €3,615); education costs; medical, life and accident insurance premiums (up to certain limits); funeral expenses. Taxpayers may deduct 19% of the amount exceeding €129 of all specialist and non-specialist medical costs. Healthcare and education expenses incurred outside the country are deductible if the taxpayer meets additional documentation requirements. Deductions are also available for legally enforceable maintenance allowances.

The incomes of a couple are assessed separately. A married person whose spouse earns less than €2,840 is allowed spouse tax credits; these amount to €422–546, depending on income, for tax year 2004. Tax credits for children depend on the number of children (children after the first benefit from a higher tax credit), age of the children, income and marital status. For taxpayers with incomes exceeding €51,646, the tax credit for each child is €285.08 for tax year 2004. For taxpayers with incomes lower than €51,646, the tax credit for each child is equal to €303.68 (€336.73 for each child after the first). The tax credit increases to €516,46 for each child when the income of the taxpayer is not higher than €36,152 with one dependent child or is not higher than €41,317 with two dependent children or is not higher than €46,481 with three dependent children or regardless of the income with four dependent children.

For employees, the employer deducts social and pension contributions at source and records them on the tax form, but does not include them in the employee’s tax calculations. These contributions vary by sector, size of the firm and whether the employee is a member of the company’s management. Managerial and many other employees negotiate their salary packages on a net basis, excluding social contributions, to protect their earnings in the event of increases in mandatory contributions.

Residency

For income-tax purposes, residents are individuals who for the greater part of the taxable income (more than 183 days in a year) are registered at the census office or have their domicile or their residence within the country.

Special expatriate tax regime

Expatriates who are deemed to be resident in Italy for tax purposes do not benefit from a special tax regime.

Expatriates who remain employed by their home company and do not establish an employment relationship with the Italian company where they are assigned generally file a tax return referred to as the unified tax return (ie UNICO).

This tax return is due by July 31st of the following year, if filed with a bank or post office, or by October 31st, if filed electronically.

Tax payments due as a result of the return must be made by June 20th. Payments on account for the year in course are due on June 20th and November 30th. The total of the two payments must equal 98% of the prior year’s tax liability.

Capital taxes

Italy does not have a net-worth tax or any similar levy on personal or household assets.

Property owners—residents or not—are liable for property tax (imposta comunale sugli immobili—ICI) on buildings and land owned for their own use or as investments. The rate is set by each local authority at 0.04–0.07% of the taxable value of the property. There is a flat-rate deduction on ICI payable on the individual’s own home.

Law 383/2001, passed in mid-2001, abolished death and gift duties on transfers of assets between spouses, all direct relatives (such as parents, children and grandchildren) and indirect relatives through the fourth level (such as aunts, uncles, nieces and nephews). Otherwise, a register tax applies to gifts exceeding €180,759.91, or €516,456.90 for handicapped recipients.

missyoulisa · Posted: Thu Jul 03, 2008 3:53 am Post subject:


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